Federal Reserve Chair Jerome Powell said officials can be patient on raising interest rates—after announcing a start to reducing their bond purchases—but won’t flinch from action if warranted by inflation.
“We think we can be patient. If a response is called for, we will not hesitate,” he told a news conference Wednesday after the Federal Open Market Committee said it would scale back by $15 billion a month starting in November.
Tapering “does not imply any direct signal regarding our interest rate policy,” Powell said, who noted that the pace put them on track to wrap the process up by mid-2022 but could speed up or slow down depending on the economic outlook.
The Fed will reduce Treasury purchases by $10 billion and mortgage-backed securities by $5 billion, marking the beginning of the end of the program aimed at shielding the economy from Covid-19. The FOMC decided to maintain the target range for its benchmark policy rate at zero to 0.25%. The decision was unanimous.
‘Prepared To Adjust’
After reductions this month and December, “the committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook,” the FOMC said in a statement Wednesday following a two-day meeting.
The Fed has been buying $80 billion of Treasuries and $40 billion of MBS every month to help stimulate economic activity that was crushed in the initial pandemic lockdown and subsequent uneven recovery.
Ten-year Treasury yields rose while the dollar and S&P 500 were little changed.
Central banks in developed economies globally are shifting their attention to the risk of inflation as supply-chain logjams spur shortages amid strong demand. The Fed’s preferred inflation measure was 4.4% in the 12 months ending September, the highest in three decades and more than double the central bank’s target. Consumers’ expectations for prices climbed to 4.2% in the same month, the highest in records going back to 2013.
“Inflation is elevated, largely reflecting factors that are expected to be transitory,” officials said in the statement. “Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”